Meb Faber’s Affordable Global Momentum Fund

/Meb Faber’s Affordable Global Momentum Fund

Meb Faber’s Affordable Global Momentum Fund

By | 2017-08-18T17:00:57+00:00 November 13th, 2014|Research Insights|12 Comments
Anyone reading this blog is probably familiar with Meb Faber. Before getting into a review of his newest project and ETF offering, I wanted to provide a little biographical background for anyone who may be unfamiliar with Meb. I first found out about Meb after reading The Ivy Portfolio:
2014-11-10 10_42_20-Amazon.com_ The Ivy Portfolio_ How to Invest Like the Top Endowments and Avoid B
The Ivy Portfolio details a simple, do-it-yourself strategy for investing like the big university endowments. You’ve heard of David Swensen and his success in managing the Yale endowment? Well, it turns out you don’t need to be David Swenson to realize portfolio results substantially similar to his. By applying some simple asset allocation concepts, and using low cost, tax-efficient ETFs to achieve target exposures, you can truly “do it yourself” and generate superior returns with less risk.
Meb also put active ETFs on the map with the launch of Cambria’s Shareholder Yield ETF (SYLD). This ETF’s strategy identifies companies with the highest shareholder yields, as measured by dividends, share repurchases, and debt repayment. It’s a sophisticated and sensible approach to investing that allows investors to take advantage of the combination of these three elements of shareholder yield in order to enhance risk-adjusted returns.
And Cambria is not only a unique provider of portfolio and investment advice, they are also just good guys who genuinely want to help people out: Meb and his teammate–Eric Richardson–have given us invaluable advice as we’ve entered the Active ETF space with our own active ETFs.
So having gotten to know Meb, Eric, and Cambria over the years, and being big believers in the momentum anomaly, we were especially intrigued to learn  that Cambria is now launching a new active ETF, the Cambria Global Momentum ETF (ticker: GMOM). We sat down with Meb to try to learn a bit about this newest offering, and below we share some highlights from that recent discussion:
Tell us a little about your strategy? How many asset classes are included?
We include all of the main global asset classes – stocks, bonds, real estate, and commodities. We first sort approximately 50 ETFs by medium term momentum (roughly 1-14 months) to select the top 33% of the universe.  Those funds are then only included in the portfolio if they are above their long term trend.   Global Momentum is a long-term trend-following strategy with strict risk control methods that are completely systematic.
Do you have any research to demonstrates the broad fund strategies?
I published a white paper “A Quantitative Approach to Tactical Asset Allocation” way back in 2006 (and updated in 2013) that shows how historically sorting assets based on trailing measures of momentum and trend has led to outperformance.  This fund will be aggressive as it is concentrated in only a third of the potential universe, but also risk aware as it has the ability to be up to 100% in cash and bonds depending on the trends in the markets.
Trend and momentum-based systems have had a tough time the past 5 years. What makes you think this time is different?
It depends on the markets you are focusing on.  Trend-following has worked spectacularly well in various individual and commodity groups – silver, gold, and oil are all in bear markets currently with  large drawdowns.  US equities have had some nice trends to the upside which makes almost any comparison difficult.  Typically trend-following can have the best relative returns when the main asset classes are going through long bear markets.  That hasn’t happened since 2009, and I imagine will happen again one of these days.  But any investment style has periods of over and underperformance.  While we have looked at trend strategies for the last 115 years, a recent book came out with a 800 year backtest – that’s a long time!
Conclusion:
On the whole, we think this is another solid offering from Cambria, representing a thoughtful approach to momentum investing. There seems to be a distinct lack of products on the market that can provide low cost, tax-efficient exposure to the momentum anomaly, so diligent investors owe it to themselves to take a closer look.

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About the Author:

Wes Gray
After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.
  • gregorsam

    Hope it does not go the way of GTAA.

  • seriously!

  • Otto

    What happend to the GTAA ETF?

  • karl shewmake

    do you understand how they arrive at the %equity versus %bond? do those numbers fall out of the top 33% methodology?

  • Jack Vogel, PhD

    The % equity and % bond are dependent on the past momentum of each asset class. As Meb states above, the ETF has “ability to be up to 100% in cash and bonds depending on the trends in the markets.” I hope that helps.

  • karl shewmake

    So,,if their model: trend and momentum plus top 33% ETFs are all currency, bonds, then 100%, got it. thanks

  • karl shewmake

    thanks Jack

  • dph

    Do etf fund of funds have extra fee drags? Would one pay 1 percent (on 100k for example) for the fund but then find out the other 99k is whittled down further before being deployed across etf asset classes?

    Also can you name any other momentum based funds in the spirit of the momentum research posted on this site?

  • There is a lot of transparency in pricing when it comes to 1940 Act products like ETFs and mutual funds. Sometimes there are “gotchas” like soft-dollars or 12b-1, but they are disclosed.

    Typically with an ETF, what you see is what you get when it comes to the expense ratio (which has to include the fees of other etfs if it is a fund of funds structure).

    There aren’t any momentum ETFs in the market that follow the research posted on our site. I’m sure this will change over time…

  • Bill Grant

    Thank you!

    Do you expect to launch a QMOM and an IMOM in the near future?

    Also, do you think the expense ratios for QVAL and IVAL will eventually fall as assets under management rise?

    By the way, is the annual expected (or realized, if available) turnover for QVAL and IVAL nearly 100%? I’m trying estimate the investment threshold below which a retail investor , with commissions of $8 per trade, say, is better off buying the ETFs instead of attempting to DIY.

  • Bill Grant

    Please ignore my question about QMOM / IMOM. I just looked at the QVAL / IVAL prospectus.

    It looks like I made the mistake of including portfolio transaction costs in the management/advisory fee? But if it’s at all possible, could you let us know the expected internal drag on returns and/or the expected turnover of the value ETFs?

    Thank you.

  • Hi Bill,
    We can’t discuss our funds on this website. Feel free to call us if you have questions about the ETFs and we can point you in the right direction.